From a pension perspective, the March 4, 2010 Federal Budget ("Budget 2010") is a modest affair, notable more for what it does not do than for what it does. Some pension commentators have argued that there is significant inequality as between those who participate in public sector and other large defined benefit pension plans and the remainder of Canadians who, for the most part, rely on RRSPs and defined contribution ("DC") plans. Budget 2010 does not contain any relevant provisions in this regard. There is:
- No cutback to public sector pension plans
- No increase to RRSP/DC contribution limits (or any other loosening up of the rules which would allow RRSP/DC accounts which have suffered significant losses to receive additional funds)
- No introduction of a public pension plan to which Canadians who do not have the benefit of an employer-sponsored pension plan could contribute
The Budget does announce that the government will undertake public consultations on improving Canada's retirement system starting this month, which is welcome.
In the pension context, the following provisions of Budget 2010 are of interest:
Non-Resident Trust ("NRT") Rules: Budget 2010 proposes modifications to the previously released NRT draft legislation. Under the NRT rules as previously proposed, there was a concern that investments by a Canadian registered pension plan (or by a trust in which the plan is invested) in certain non-Canadian trusts could, in some circumstances, result in an unintended and onerous tax liability for the pension plan. A comfort letter was subsequently issued by the Department of Finance indicating that a recommendation would be made that the NRT rules be altered to provide an exemption from the rules for most Canadian registered pension plans. Consistent with this, Budget 2010 proposes a number of changes which would appear to address the previous concern. In particular, the exemption for investments in commercial trusts is expanded and tax-exempt entities, including registered pension plans, are excluded from the application of certain rules. Regarding the latter, it is to be noted that the exclusion would not appear to apply to a pooled trust vehicle which is not tax-exempt. Pension plans of a single employer or of a related group of employers sometimes pool all of their assets in a single trust for investment purposes. This trust may or may not be tax-exempt, depending on whether an election is filed to have the trust treated as a tax-exempt master trust. In the absence of an election, the trust would be a normal taxable trust (although typically the trust would avoid regular Part I tax by paying all of its income each year to the pension plan trusts). If under the NRT rules as ultimately enacted, the exclusion is restricted to tax-exempt master trusts, sponsors will wish to re-consider structures involving pooled trust vehicles which are not tax-exempt.
Rollover To Registered Disability Savings Plan: The rollover rules on death for RRSP/RRIF proceeds and certain lump sums from registered pension plans will be extended to allow such amounts to be rolled over to the Registered Disability Savings Plan ("RDSP") of a financially dependant child/grandchild of the deceased. The amount that may be rolled over cannot exceed the available RDSP contribution room. The change is effective for deaths on or after March 4, 2010.
U.S. Social Security Benefits: Prior to 1996, Canadian residents in receipt of certain U.S. social security benefits were required to include only 50% of the benefits in income for Canadian tax purposes. As a result of changes to the Canada – U.S. treaty, the inclusion rate was increased from 50% to 85% effective 1996. Budget 2010 proposes that, effective January 1, 2010, the 50% inclusion rate be re-instated for Canadian residents who have been in receipt of U.S. social security benefits since before January 1, 1996. The reduced inclusion rate will also be available for their spouses and common-law partners who receive survivor benefits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.